Wednesday, July 30, 2008

Salada 9:1 stock split - Analysts say action may be futile

Salada Foods, the Jamaican firm that manufactures and packages instant coffee, is planning to a nine-to-one share split aimed, the company says, at creating liquidity in the stock.

But while welcoming the move to stimulate trading in Salada, analysts warned yesterday that the strategy could could come to naught if big shareholders, like Donovan Lewis, who, mainly through his Ideal Group of companies, holds more than 70 per cent of the firm, continue to hold the stocks closely.

"Although the nine-to-one stock split would increase the number of shares outstanding, it would not necessarily allow for that much more liquidity to trade ," said Jason Dear, equity trading manager at First Global Financial Services.

More than 70 per cent

"The major shareholders hold more than 70 per cent of the shares."

Salada, which is listed on the Jamaica Stock Exchange (JSE), currently has 10.4 million outstanding shares, few of which generally see activity on the exchange.

When the stock last traded on July 22, it traded down by $2 to $133 on 800 units.

But on the weekend, the exchange reported that it has been informed by Salada's directors of their plan for the share split, out of 489.6 million new shares that are to be created.

The new shares, plus the existing issue, will give the company 500 million authorised shares, just under 21 per cent will be issued.

"The reason (we are doing this) is to try and make them (Salada stocks) more affordable when they come on the market," said the company's managing director, John Rosen.

More shares

"We are trying to bring some liquidity in the market and hopefully more shares will be available."

Outside of the cross-listed stocks, Salada is the second-most expensive on the Jamaican exchange, trumped by Lascelles which is trading above $600 per share.

The proposal by Salada, however, will have to be formally endorsed at an extraordinary general meeting of shareholders on August 28, an undertaking that is likely to be easy given Lewis' big stake in the company.

The other substantial shareholder is Advantage General Insurance, which is controlled by billionaire Michael Lee Chin, a close friend to Lewis.

Lewis consolidated his hold the company with the acquisition of additional shares last year to boost his more than 60 per cent share to his current holding.

Mayberry Investments had tried to buy a bigger slice of the company through an improbable take-over bid of its own.

Lewis ignored the offer, stopping Mayberry dead in its tracks.

But even with a big bank of shares now available, brokers stressed that they would have to see the posture of the big players in Salada before coming to a conclusion on its impact on liquidity.

"It (the share split) will theoretically increase the amount of liquidity and trading of the stock, but it will depend on whether the current shareholders who closely hold the stock have any need or will want to sell any of their holding," said Johann Heaven, vice-president for planning and analysis at Scotia DBG.